Economics Definitions for A Level & IB Economics

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Economics is Economics regardless of whether you are sitting for the A Level Exams or the IB Exams. Hence, we have put together a library of key definitions that all economics students should learn. Where it only applies to A Level students or where it only applies to IB students, we highlight that accordingly.

Below is a sample of both Microeconomics and Macroeconomics definitions. Students of Mr. Kelvin Hong’s economics tuition programme will receive the full set of definitions for all topics.

MICROECONOMICS
ScarcityA situation faced by all economies where there are unlimited wants, but limited resources to fulfil these wants.
Free MarketWhere the market forces of supply and demand determine the allocation of resources, with no government intervention.
DemandThe quantities of a good or service that consumers are willing and able to consume at various prices over a period of time.
Law of DemandThere is an inverse relationship between price and quantity demanded, ceteris paribus
SupplyThe quantities of a good or service that firms are willing and able to supply at various prices over a period of time. 
Consumer SurplusThe difference between the maximum price that consumers are willing and able to pay for a good or service, and the actual amount that is paid.
Producer SurplusThe difference between the minimum price that producers are willing and able to receive for a good or service, and the actual amount that they receive.
Competitive SupplyWhen the same scarce resources are used for the production of two goods, such that the resources used for the production of a unit of one good cannot be used to produce a unit of another. 
Joint Supply
Goods that are produced together from the same resource; an increase in quantity supplied of one causes an increase in the supply of the other.
Derived DemandWhen a good (FOP) is needed in the production of another.
SubstitutesGoods that are used as alternatives by consumers to satisfy the same want or need, XED value is positive.
ComplementsGoods that are jointly used by consumers to satisfy the same want or need, XED value is negative.
Price MechanismInteraction of market forces of supply and demand to establish a market equilibrium price and quantity.
Market EquilibriumWhen quantity supplied equals quantity demanded such that there is no tendency for quantity or price to change.
Price Elasticity of Demand (PED)A measure of the degree of responsiveness of the quantity demanded of a good to changes in price of the good, ceteris paribus.
Cross Price Elasticity of Demand (XED)A measure of the degree of responsiveness of the demand of a good to changes in price of another related good, ceteris paribus.
Income Elasticity of Demand (YED)A measure of the degree of responsiveness of the demand of a good to changes in consumer income, ceteris paribus.
Price Elasticity of Supply (PES)A measure of the degree of responsiveness of the quantity supplied of a good to changes in price of the good, ceteris paribus.
Indirect TaxA levy imposed by the government on each unit of good produced by firms. The tax burden may be wholly or partially passed on to consumers in the form of higher prices.
Specific TaxTaxes calculated as a fixed amount of levy on each unit of good sold. 
Ad valorem TaxTaxes calculated as a fixed percentage of the price of the good or service.
Tax IncidenceThe amount of tax burden borne by consumer or producer.
Indirect SubsidyA payment made by the government to firms, with the aim of offsetting costs of production of firms and increasing the supply of a good or service by firms.
Price Ceiling
A legally-established maximum price set by the government that is usually set below the market equilibrium price, usually with the aim of making goods such as necessities more affordable to lower income groups, e.g. food price controls, rent controls.
Non-Price Rationing Mechanisms
When price no longer fulfils the signalling, incentive and rationing function, and means other than price are used to distribute the goods to buyers, like waiting lines using a first-come-first-served basis, or coupon distribution system.
Black or Parallel or Underground MarketsA market where (rationed or other) goods are resold illegally at a higher and often exorbitant price to consumers who were originally willing but unable to obtain the good or service.
Price Floor
A legally-established minimum price set by the government that is usually set above the market equilibrium price, usually with the aim of protecting the interests of domestic producers or low wage workers (in the case of Min Wage).
MACROECONOMICS
GDPThe total market value of all final goods and services produced in a given time period by factors of production within the geographical boundaries of a country.
GNITotal income earned by factors of production owned by residents of a country regardless of geographical location from which interest/profits/wages/rent are earned
Real(Real) refers to the value being adjusted for inflation by referencing it to chosen base year prices.
Nominal(Nominal) refers to the value being taken at current prices, unadjusted for inflation.
GDP DeflatorA function measuring the current year’s prices relative to a given base year; calculated using the formula:

GDP Deflator = ( Nominal GDP/ Real GDP) * 100
HDIAn index comprising a value determined by several indicators acting as key dimensions of human development; HDI is measured on a scale from 0 (lowest) to 1 (highest), and HDI values are used for inter-country comparison.

It comprises Real GNI per capita, Literary Rates (Mean and Expected Years of Schooling) and Life Expectancy at birth.
Business CycleSituations where there are fluctuations in real GDP over a given period of time, consisting of economic booms and busts.
RecessionA situation where there are two consecutive quarters of negative growth in real GDP
Aggregate DemandTotal value of spending on domestic production of goods and services by the government, firms and households in a given time period; it is the sum of (C) + (G) + (I) + (X-M).

(C): Total consumption expenditure on domestically produced goods and services to satisfy consumer needs or wants.

(G): Total government spending on goods and services.

(I): Total spending by firms on capital goods like production plants and machinery, inputs like raw materials and goods in the process of production, as well as unsold goods.

(X-M): Net export expenditure or the net difference between export revenue received by the domestic economy, and import expenditure paid to foreign economies.
Aggregate SupplyTotal amount of goods and services produced by an economy at different price levels over a period of time.
Short Run (Macro)Refers to the time period in which the cost of production does not change in response to price changes.
Long Run (Macro)Refers to the time period in which the price of all resources are flexible and will change to reflect any price changes.
Full Employment 
Output (Yf)
A situation in which the level of unemployment in a country is equal to the natural rate of unemployment.
Potential Output
The level of output that an economy is capable of producing at if all resources are fully and efficiently utilised, at a given level of technology and in a given time period; at this level of output, there exists no deflationary or inflationary gap. 
Equilibrium 
National Income
A point at which an economy operates on, where there exists no tendency towards an expansion or contraction of national income.
Inflationary GapA point at which an economy’s actual output is greater than its full employment input.
Deflationary GapA point at which an economy’s actual output is less than its full employment output.
Circular Flow of IncomeA model which depicts how money, as well as goods and services, flow through the economy between households and firms. The model also accounts for the existence of three other economic agents – the government, foreign markets, and banks. There is thus an interdependence between these five economic decision-makers interacting and making choices in an economy.
WithdrawalsThe portion of income not spent on domestically produced goods and services and are outflows from the circular flow.
InjectionsSpending on goods and services other than domestic consumption. Consists of government spending, investments and Export revenue which results in inflows into the circular flow.
Purchasing Power 
Parity (PPP) Exchange Rate
An exchange rate between currencies such that buying power of both currencies in their respective countries is made equal for more accurate cross country comparison that accounts for Cost of Living differences.

PPP E/R

= Amount of Currency A needed to buy Z  in Country A /
Amount of Currency B needed to buy Z in Country B

Z = Representative basket of goods & services
Consumer Price Index (CPI)An index that measures the changes in prices of a basket of goods and services consumed by the average household.
InflationSustained increase in the General Price Level (GPL) of an economy over a given time period.
DeflationSustained decrease in the General Price Level (GPL) of an economy over a given time period.
DisinflationA decrease in the rate of inflation over a given time period.
StagflationA situation in which unemployment and inflation increase simultaneously.
Demand-Pull InflationInflation that occurs when the aggregate demand of an economy is increasing near of at full-employment.
Cost-push InflationInflation that occurs when the aggregate supply of an economy is falling due to increases in unit costs of production not caused by excessive aggregate demand.
Wage-push InflationWhen there is an increase in wages more than proportionately to the accompanying rise in productivity, unit costs of production rise, causing an increase in the GPL; a form of cost-push inflation.
Imported InflationA form of cost-push inflation where increases in price of imports result in an increase in the unit costs of production, putting upward pressure on the economy’s GPL.
UnemploymentIndividuals of 1) working age who are 2) willing and able to work and are 3) actively seeking employment, but who are without a job. 
Underemployment
When people of working age either 1) work part-time jobs when they rather work full-time or 2) are employed in jobs which do not fully utilise their level of skill and education. 
Labour ForceRefers to the group of individuals in the population who are of working age and willing and able to work. 
Claimant Unemployment (For IB only)A measure of all individuals who receive unemployment benefits.
Standardised Unemployment
(For IB only)
A measure of all individuals who are of the working age, available to start work within two weeks and who are actively seeking employment, but are currently without work.
Cyclical / Demand Deficient UnemploymentOccurs during the downturn of a business cycle, caused by a reduction in aggregate demand in an economy (demand-deficient).
Structural UnemploymentOccurs when there is a mismatch between the labour skills in demand by employers, and the skills which the workers possess and supply.
Frictional UnemploymentOccurs when workers are in between two jobs, are in the process of searching for a new job, or waiting to begin a new appointment.
Seasonal UnemploymentOccurs when demand for certain types of labour fluctuates during different periods of the year, due to change in consumer need.
Low Income InequalityWhere there is a “fair” distribution of income amongst a population, which may be considered as having a Gini Coeficient of below 0.4.
Lorenz Curve
(For IB only)
A graphical representation of the proportion of national income earned by a particular percentage of the population in an economy. The Lorenz Curve thus illustrates the level of equality in income distribution that exists in an economy.
Gini Coefficient
A measure of income inequality in a country, ranked on a scale from 0 to 1, where 0 corresponds to perfect income equality while 1 corresponds with perfect income inequality.
Poverty (For IB only)Refers to a situation in which the basic / minimum consumption needs of individuals are not satisfied.
Absolute Poverty
(For IB only)
A situation in which individuals live below a particular income level deemed necessary to meet their basic needs.
Relative Poverty
(For IB only)
A situation in which the individual lives below the prevailing standard of living typical in their society.
DebtAmount of money owed by individuals or organisations after taking out loans / borrowing in the past.
Direct Tax
(e.g. personal income taxes, corporate taxes)
A levy or charge that has to be paid to the government for which the incidence cannot be passed on, and the tax burden is wholly shouldered by the individual, household or firm.
Progressive TaxationA system imposed such that higher income earners pay a larger percentage / fraction of their income in taxes compared to lower income earners.
Proportional TaxationA system imposed such that all income earners pay the same percentage / fraction of their income in taxes.
Regressive TaxationA system imposed such that lower income earners pay a larger percentage / fraction of their income in taxes compared to higher income earners.
Economic GrowthAn increase in Real Gross Domestic Product (GDP) over a period of time.
Actual
Economic Growth
% change in RGDP over a given time period usually over a year.
Potential Output
The full employment output produced by an economy when operating at the given level of technology with resources being fully and efficiently utilised.
Potential 
Economic Growth
An increase in the economy’s capacity to produce (full employment output) when operating at the given level of technology with resources being fully and efficiently utilised; level of potential output is increased.
Sustained & non-Inflationary Economic GrowthEconomic Growth that is continuous over time and without incurring high inflation rates
Sustainable Economic GrowthIncludes Sustained Economic Growth and with meeting the needs of the present generation without causing a decline in the SOL for future generations
Inclusive Economic GrowthEconomic Growth that is broad-based, with the majority enjoying higher incomes and improved SOL.
Foreign Direct Investments (FDI)Long-term investments in physical capital (machinery, production plants) by foreign multinational corporations in a country.

These and more are resources that all out students will have access to. To view samples of our other resources, do check out our Economics Videos, Economics Infographics and Mindmaps, Economics Real World Examples and Economics Model Essays.

Students may also wish to learn more about command words in economics questions as well as how to write an economics essay that will score!

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